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FundsIndia Strategies: Lump sum or SIP?

You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages.

So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go.

#1: You invest for the long term

According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only 12 years can be called long term? Yes, partly that, but more because that is the time frame over which the markets did not have any negative return periods. In other words, the chances of your earning negative returns would be nil over any 12-year buckets from 1980 till date, irrespective of which date you had invested a lump sum.

This 12-year period we are talking about is, of course, subject to change. It could be 10 years or 15 years. It varies based on the time period we consider. Hence, again, different market phases (bull or bear) play a role in window dressing this, or in removing the veil.

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#2: You really know the lump sum you need

No, there is no debate here on what amount can be termed lump sum – Rs. 50,000 or Rs. 5 lakh. What I mean here is whether the lump sum is sufficient to meet the goal. When you invest a lump sum, there is more reason why you should have a goal/target for it. The tendency to have a goal is better when you do an SIP, where you say – “I will invest Rs. 10,000 a month over the next 10 years towards my daughter’s education,” or any other such goal.

When you do that, you have a fair idea of what to expect – not just when it comes to returns, but also when it comes to your own savings too. For instance, you know, even without any compounding of returns, that you will save (your investment cost) Rs. 12 lakh (Rs. 10,000 a month for 10 years) over this period.

However, with lump sum investing, you do not tend to think about what the investment will grow to, and hence, there are chances that you would never top it up to ensure that you have a comfortable kitty.

For instance, let’s say you invested Rs. 5 lakh for 10 years, and it earned 12 per cent a year and grew to Rs. 15.5 lakh. By the 8th year, it suddenly struck you that you can use this money for your kid’s college education which is, say, two years away.

You do a rough calculation and realise you need Rs. 25 lakh. How much would the Rs. 5 lakh of investment fetch you? Just Rs. 15 lakh! This means you fall short by Rs. 10 lakh. In two years, you have to make this good by investing a lump sum of Rs. 8 lakh (at the same rate of return assumed), or by investing Rs. 38,000 a month for the next two years through an SIP – both of which may seem challenging, especially if you do not have the habit of regularly saving.

Even if you manage this, a 2-year equity route could kill your ambitions. This is where, in reality, not having an idea of how much lump sum is good enough for you can hurt you. In this case, had you known you would need Rs. 25 lakh, your lump sum invested 10 years ago should have been Rs. 8.5 lakh, provided you had that kind of surplus.

SIPs give you the chance to gradually increase your savings, without hurting your cash in hand too much, and without hurting you in the market. But if you know your goal, you have the sum to spare, and of course, to satisfy our other criteria, lump sums can be good.

#3: You can stay calm

Yes, in rallying markets, it is likely that you can enjoy super high returns from your lump sum investments. But if you can stay calm in market crashes such as the one in 2008, when you see your investment fall by over 50 per cent, then lump sum investing is for you.

But remember, a single massive fall such as 2008, takes a lot of time for your fund to recover when you invest through a lump sum, as opposed to the SIP way of investing. Just to give you an example, had you invested in Reliance Equity Opportunities on January 1, 2008 (just before the market slide that year), you would now be sitting on a healthy annual rate of return of 14 per cent.

But had you started your SIP on the same day in 2008 and continued till date, your returns would have been 23.5 per cent annually (IRR). That means there is still an opportunity loss in not averaging in a bad market like 2008. If you will not do that comparison and stay happy with the returns you see, good for you.

Transfer systematically

So, what do you do if you have a large sum in hand, but cannot invest lump sum if you do not fit into any of these criteria? Invest in a liquid fund and do a Systematic Transfer Plan (STP). Your lump sum in a short-term debt fund (liquid or ultra short term) will earn higher returns than your savings bank interest, and you will get to average by entering markets systematically.

The one choice you have here is to take a shorter period of averaging (6-12 months) if the amount is not too large, provided you have a 7-year plus time frame. Else, average over at least 36 months.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis of investment decisions. To know how to read our weekly fund reviews, please click here.

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29 Responses to FundsIndia Strategies: Lump sum or SIP?

  1. mms August 12, 2015 at 12:42 am #

    11.08.15
    Resp Vidya Bala Madam ,

    We have been very fortunate enough to have your depth of knowledge
    right from Business line and then to the Fundsindia.com, which is still shining with great honours….kudos to all the Team …..

    We have been going through the numerical articles that you have been writing and
    really appreciate the sincerity and gravity of straight forwardness that you have been maintaining all throughout. Its absolutely the best in India , we have seen so far…
    Our prayers to God to give you lot of strength, well being and energy to keep this great service you have been doing, going on and on….. All the Very Best Forever….

    While all this is not superficial at all …We have been disappointed that we have not found any mention of the ETFs and Inverse ETFs mention anywhere in these columns at all.

    So we request you to kindly add these as a special case for all of us and its utility in India …
    and how to go all about it etc besides giving its merits and demerits also…. We are also unaware as to whether Fundsindia has this facility and if so how can we make best use of it…

    We will highly appreciate the wholesome article on ETFs from this column at the earliest
    as PF funds etc also make an entry to it….

    Thanks and Regards
    mm shende 97 66 108 133

    • Vidya Bala August 14, 2015 at 12:34 pm #

      Hello Sir, Thanks for your appreciation. We will definitely look at covering ETF in the near future. ETFs can be invested through your demat/brokerage account. The facility is available with FundsIndia through share trading account. At mutual fund research, I have through many articles said why ETFs in the Indian context does not deliver as much as well as actively managed funds. A recent one is point 4 and 5 in this article: http://www.fundsindia.com/blog/mutual-funds/five-pieces-of-bad-mutual-fund-advice-to-ignore/7954
      Irrespective of whether PF funds enter it or otherwise unless there are more nuanced ETF products and the key benchmark indices themselves are well constructed, ETFs may not be optimal options in the Indian context.
      When ETFS are shorted (derivatives market) they become inverse ETFs.
      Thanks, Vidya

  2. Chanikya August 12, 2015 at 10:38 am #

    Nice Article Vidya. But people usually say not to invest lumpsum when sensex PE ratio is above 21 . But the PE ratio of some of the funds like quantum long term equity and icici prudential dynamic fund PE ratio are currently at 18 or less than 18 . And on the other side if we look at PE of some well performing mutual funds like axis long term equity and Idfc premier equity PE is around 26. So my actual query is at current market situation is it better to invest lumpsum in quantum or icici dynamic as their PE is low so that we get good returns in future say around after 10 years and when the PE of axis long term equity goes down to 18 or some where near to it then we can invest lumpsum in it. Correct me if my above explanation is wrong. I am looking at lumpsum invest so I raised this query and I have account with Fundsindia.

    Thanks

    • Vidya Bala August 14, 2015 at 12:52 pm #

      Hello Chanikya, There is no sanctity behind a PE of 21. Also different sectors have different valaution metrics. For a growing company/sector a PE of 21 may be normal while it may be very high for a company struggling to get double-digit growth. A fund with a value focus will always sport a low PE comapred with one with growth focus. You see Quantum and ICICI Dynamic with lower valautions as they are value consious and invest based on valautions. If you are keen on such style of investing you may. However, that does not mean growth-focused funds cannot deliver. They hold stocks that are trading at higher valuations because their earnigns growth is likely higher or expected to be high.
      Also the stocks inside the fund are constantly subject to chance. Hence, it may be better to look at one valuation metric such as the Sense or Nifty PE to assess market valuations and then invest, instead of fund valuations. There again, trailing PE is not a great indicator. So, as it is not easy for an investor to guage this, it is best left to average over several market phases and several low and high valuations :-)

      • Chanikya August 19, 2015 at 5:10 pm #

        Thanks Vidya for your valuable suggestion.

  3. peeyush jain August 12, 2015 at 10:57 am #

    hi read your article i just invested 6 lacks through funds india in two schemes.
    though horizon is long tern (5 years) but after reading thi i think should have invested through liquied . should i withdraw and invest through liquied

    • Vidya Bala August 14, 2015 at 12:22 pm #

      Hello Peeyush, Since you have already invested, do not disturb the compounding. You will start from scratch by removing and restarting. In the same funds, see if you can start some SIP amounts and start the averagign process there. If you have goals, look at a possible shortfall based on the current lump sum and assess your SIP amount accordingly. Vidya

  4. Sekar N August 13, 2015 at 9:50 am #

    Hi Vidya,
    I have 2 lakhs in hand for investment. Please can you advise me on which funds to invest them in. I prefer the STP route rather than lump sum. I have a 10 year investment horizon.

    Thanks.

    Sekar N

    • Vidya Bala August 14, 2015 at 12:15 pm #

      Hello Sir, If you are a FundsIndia investor, please write to us using the ‘Advisor appointment’ feature in your account. Our advisors will understand your profile and provide suggestions accordingly.This forum is a public discussion forum. thanks, Vidya

  5. Raghavendra August 14, 2015 at 12:29 am #

    Adding to the points mentioned above, one more thing anyone can do is;

    Generally the Lump sum is a wind fall like bonus or some gift, so one can look into existing SIPs already running or lump sum amount already invested and top them up (I would top up the not reaching a target return rate).

    Also this need not be Lump, but the extra money that is saved at the end of the month.

    I guess this is the kind of thing that FundsIndia offers through Value Investing Plan.

    Vidya you can comment or suggest upon this.

    Thanks for the great article for mentioning different options with meaningful insights..

    • Vidya Bala August 14, 2015 at 11:54 am #

      Raghavendra, thanks. Yes, people can add to existing investments. However, if it is a large sum, the issue of market timing even in an existing fund will still be there..provided the future SIPs continue for a long enough period. VIP ( value averaging investment plan) is different. It helps average different amounts every month based on market levels. thanks, Vidya

  6. kavindra August 14, 2015 at 5:01 pm #

    Hello Vidya,
    i need an advise i want to invest 100k (From Liquid Fund To Equity Fund through STP)
    my horizon is 5 0r 7 years which fund is good to invest in this current market.
    kindly suggest me.is it right time to invest or not.
    waiting for you reply
    Regards
    shah

    • Vidya Bala August 20, 2015 at 3:54 pm #

      Hello Kavindra, fund suggestions are restricted to investors of FundsIndia. If you have an acitvated account, please use the ask advisor appointment feature (help tab) and our advisor will help you suitably.
      As for your time frame, any time is a good time to invest but make sure after your 12-month STP, you continue some regular savings through SIP in the same funds to average effectively over at least a 3-5 year period and then hold longer for your 5-7 year horizon. thanks, Vidya

  7. Karthik August 15, 2015 at 4:20 pm #

    Hi Vidya

    Your articles are always so informative and useful.

    I have 2 questions to ask.
    1) You mentioned that Nifty PE can be used to assess if it is a good time to invest. But that trailing PE is a not a good indicator. The PE provided in the NSE website, is it trailing PE?
    http://www.nseindia.com/products/content/equities/indices/historical_pepb.htm
    Can you please explain why trailing PE many not be a good indicator? Can one use Price to book value as an indicator? At what values of P/B ratio would it be wise to start investing?

    2) Unfortunately regular mutual funds cannot be used as collateral for trading purposes. So one needs to invest in ETFs or stocks. If you could analyse and rank ETFs that would be helpful.

    Thanks

    • Vidya Bala August 20, 2015 at 3:51 pm #

      HEllo Karthik,

      thanks for reading our blog.

      1. Yes, the link you have is trailing PE. expected PE is a forecast..so you will not have them in the stk. exchange website. trailing PE is a reflection of what has already happened in the market. To some extent, while it will tell you where we are now, market returns are always based one expectations..that si where we will be. If market appears expensive at one point based on trailing PE but the earnigns growth is expected to catch up say in 306 months, the forecasted PE will tell us where we are headed and whether there is room for returns. Do not ask me for forecasts. I do not have one :-)
      the research scope that I have is for long-term investing. In the ETFs, given that they mirror indices and not optimal wealth builders today, as opposed to active funds, do nto therefore figure in our coverage. If we have a better range of ETFs and different varieties, we will definitelye xplore them in future. thanks, Vidya

  8. Sheetal August 17, 2015 at 9:27 am #

    Hi Vidhya, same question as asked by Deepak – what are the tax implications when an STP is started?

    • Vidya Bala August 20, 2015 at 3:42 pm #

      Hello Sheetal,

      In the fund from which you are transferring – that is the source fund, ever unit redeemed will be subject to capital gains. If it is a debt fund, any transfer before 3 years will suffer short-term capital gains at your slab rate and over that it will have indexation benefit and LTCG tax of 20% after indexation. For the fund to which STP is being made, the creation of units will be the purchase date for that fund and any future sale will be based on such purchase date. For both these first in first out will apply when the units are switched or sold. thanks, Vidya

      • Sheetal August 24, 2015 at 1:17 am #

        Hi Vidya, the “LTCG tax and 20% after indexation” will be applicable only for units that are older than 3 years, right?

        • Vidya Bala August 26, 2015 at 2:18 pm #

          Yes, that’s right.

  9. Rajeev Ranjan Kumar September 21, 2015 at 6:33 pm #

    Hi Vidya,
    Thanks for the great article. I am a newly registered user @fundsindia and wanted to invest around 50k as lump sum, I have already invested some amount in TATA balanced fund and was looking for investment term for 3-5 years. Please suggest.

    • Vidya Bala September 23, 2015 at 2:36 pm #

      HellO Rajeev, I will raise your query as a ticket and respond to it. It will reach your mail. id. In future, for any portfolio queries kindly use the advisor appointment feature in the help tab of your account. Your query will be responded to or you will receive call from an advisor. This mode will help us keep tab of your queries and also the response we gave. The blog is more of a public discussion forum.

      thanks, Vidya

  10. Vishesh December 24, 2015 at 1:32 pm #

    hi vidhya, I invest HDFC top 200 – 1000 p.m. , HDFC balanced , uti MNC growth ,uti opportunities, SBI blue chip regular growth – 500 p.m. every fund , mujhe abhi or investment karna hai aap rai de ki main in fund me hi amount badha do ya lumpsum investment karu or kin fund me karu, plz reply

    • Vidya Bala December 30, 2015 at 10:11 pm #

      Hello Sir,

      Thanks for writing to us. If you are an activated investor with FundsIndia, please route your query through your account, in the help section and we will advice you. It is a free service. Please activate your account, if you do not have one to avail our service. The blog is a general discussion forum and we are constrained from giving investor-specific advice. thanks, Vidya

  11. TARUN sHARMA February 4, 2016 at 12:07 pm #

    Hi

    i am 30 year old and i want 4 cr after 30 years and if i invest 50 thousand lum sum amount for Next 25 year so can i reach to my goal on my retirement?
    you can tell me on my this num. 9646603096.

    your early response shall be highly Appreciated.

    Regards
    Tarun Sharma

  12. Neelesh Khare March 12, 2016 at 9:55 am #

    I want to know of additional purchase in mutual fund and what is difference between additional purchase and sip

  13. Sinu Kurian May 5, 2016 at 8:19 am #

    Hi,

    Very useful article. Currently I have lumpsum 12L from capital gain (selling property) which I’m supposed to invest further within next 2.5 years to avoid 20% income tax.
    Please suggest best plan to invest now with short term goal. I made a mistake in past by just keeping it as FD in my saving account. I’m ok with taking risk into market.

    • Vidya Bala May 6, 2016 at 1:04 pm #

      Hello Sinu,

      If you are going to deploy the money into another property within the next 2.5 years; you need to invest it in a separate account maintained with a nationalised bank under the Capital Gain Account Scheme (CGAS). Such investment needs to be made before the due date of filing of return of income in order to claim exemption and should be utilised only for specified purposes within the stipulated time period. Hence you cannot invest elsewhere. If you do, you will not have the capital gain exemption on the property; it will be taxed.
      Vidya

  14. KARTHIKEYAN July 17, 2016 at 8:17 am #

    Hi Divya

    Pl explain the difference between debt fund and bank FDs? which one is worth investing for a 5 yr horizon?

    regards

    NP Karthikeyan

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